Arc generally supports the idea of commercial consolidators but considers the proposals in the DWP consultation have significant gaps in member protection.

Properly financed and regulated commercial consolidators can offer financial support, time and expertise to allow defined benefit liabilities to run off naturally. This is something many sponsors simply cannot give. If setting the bar too high means this market never takes off, there could be more members with benefit cuts which could have been avoided. We recognise it’s a tricky regulatory balance.

The biggest gap in the consultation is the absence of any real focus on benefits. It is taken as read that “the same” benefits can be provided after transfer as before. In reality pension scheme benefits are complicated and often uncertain. That matters less when there is a sponsor to pick up residual risks. If residual risks are to be shaved off on transfer to a consolidator, that becomes a member protection issue. Unless they have done a pensioner buy-in, most schemes have no legally signed off benefit specification of all benefits offered by the scheme (documented and undocumented). There has been no check that the administration practices and calculation methodologies are legally correct.

For consolidation to work, schemes need to re-focus some of their time and resources towards understanding and sorting out precisely what liabilities they are transferring. Consolidators will want certainty on the liabilities they are accepting. Actuaries will be unwilling to certify bulk transfers riddled with latent legal risks. And the current legal framework explicitly does not require the benefits to be “the same” before and after transfer.

Anna Rogers, Senior Partner at Arc comments “Funding isn’t the only thing that matters. Who bears the risk of the full entitlement not having been properly secured with the consolidator? The member? The consultation misses this point completely, but it is crucial to successful member outcomes.”

Jane Kola, Partner at Arc comments “Good member outcomes are key to confidence in pensions. The consultation is a step in the right direction but the proposals are not ambitious enough. Increasing the chances of members receiving full or close to full legal entitlements must surely be the aim. That requires a clear understanding of benefits and legal risk alongside the financial and investment risks.”

Read Arc’s response in IPE